Healthcare conglomerate Johnson & Johnson (NYSE:JNJ) is a common holding in long-term investors' portfolios for one reason: its consistency.
Johnson & Johnson's consistency derives from its business structure. Although J&J reports as a single entity, it consists of more than 250 subsidiaries, which makes it easy for the company to acquire or remove puzzle pieces with relative ease from time to time.
It also has three reporting segments -- pharmaceuticals, medical devices, and consumer-health products -- that each serve a purpose. Pharma provides the backbone of its margin and growth, medical devices are a long-term growth play on an aging global population, and consumer health provides a bounty of inelastic products with strong pricing power and predictable cash flow.
Johnson & Johnson showcases a bountiful pipeline
Last week, Johnson & Johnson added to its allure with its annual analyst day meeting, which primarily focused on its pharmaceutical pipeline. Much as it called for two years ago, J&J provided an outlook that calls for at least 10 blockbuster drug filings between now and 2021.
The company has two promising novel molecular entities that have already been filed with the Food and Drug Administration (FDA) and should be launched later this year, assuming approval. These currently experimental drugs are guselkumab for psoriasis and sirukumab for rheumatoid arthritis.
Guselkumab is of particular interest because it targets the interleukein-23 protein that's known for its specificity in terms of immune response for skin disorders. In phase 3 clinical studies, it not only left the placebo in the dust at the 16-week and 48-week marks, but it also mopped the floor with AbbVie's (NYSE:ABBV) Humira, the best-selling drug in the world, with regard to near-complete skin clearance at weeks 16 and 48.
Looking ahead, J&J listed nine other compounds in development with an expectation of a regulatory approval filing between 2017 and 2021. These are (as taken directly from J&J's press release):
- apalutamide (ARN-509) for pre-metastatic prostate cancer.
- esketamine for treatment-resistant depression.
- talacotuzumab (CSL362) for acute myeloid leukemia.
- erdafitinib (FGFR inhibitor) for solid tumors.
- niraparib for prostate cancer.
- imetelstat for myelofibrosis.
- pimodivir (JNJ-3872) for influenza A.
- lumicitabine (JNJ-1575) for respiratory syncytial virus (RSV) infection.
- JNJ-7922 (orexin-2 agonist) for adjunctive treatment for major depressive disorder.
Imetelstat is an exciting first-of-its-kind compound. What attracted J&J to Geron (NASDAQ:GERN), the developer of imetelstat, was its success in phase 1 studies. No prior therapy had led to a partial or complete response in myelofibrosis patients, which is exactly what imetelstat did. In fact, the only FDA-approved drug on the market right now for myelofibrosis focuses on its symptoms (enlarged spleen and anemia) but does nothing to slow disease progression. With interim data on imetelstat looking promising for the higher 9.4 mg/kg dose, Geron and J&J have to be excited about its potential.
Analysts walking away from J&J's investor presentation, along with shareholders, have to be pleased with the progress the company is making.
This clinical data overshadowed what was otherwise a solid forecast
However, this outlook was marred by the release of clinical data just a few days prior.
According to data from two recently completed clinical studies, J&J's SGLT-2 inhibitor to treat type 2 diabetes, Invokana, was found to have led to a higher risk of foot and leg amputations compared to the placebo. In the first study, the risk of amputation in patients treated with Invokana was 5.9 out of every 1,000 patients over the course of a year, compared to 2.8 out of every 1,000 patients given the placebo. The second trial demonstrated the equivalent of 7.5 out of every 1,000 patients for the Invokana arm, compared with 4.2 out of every 1,000 patients given the placebo.
So, what's this mean for J&J's blockbuster type 2 diabetes drug? According to the FDA, J&J will now have to place a boxed warning on Invokana regarding an increased risk of foot and leg amputations.
What makes the addition of this warning so worrisome for J&J is that Invokana's sales tumbled in the U.S. during the first quarter by 17% to $247 million. It's unclear what caused this rapid backtrack in sales (i.e., was it competition or an inventory issue?), but it occurred well before the release of this long-term safety data. Now that this safety data has been released, it could provide a catalyst for physicians and consumers to make the switch to Eli Lilly's (NYSE:LLY) and Boehringer Ingelheim's Jardiance, another SGLT-2 inhibitor.
For those who may not recall, Eli Lilly and Boehringer reported that Jardiance provided a statistically significant reduction in cardiovascular events and risk of death relative to the placebo in the EMPA-REG OUTCOME long-term study. J&J's long-term study on Invokana isn't due out until later this year. This means the new data release plus the EMPA-REG study gives Jardiance two clear positives over Invokana.
Understandably, Johnson & Johnson's product portfolio can overcome weakness from a single drug, and as you saw above, it has a healthy pipeline. However, J&J appears to be running into issues with what should be a foundational therapy over the next five-to-10 years – and that's not good news.
At this point, it's probably not worth altering your investment thesis in J&J if you're a shareholder or prospective investor, but it may be worth toning down your growth expectations for the company's diabetes segment in the interim.